When market and media players speak of hawks and doves, Reserve Bank governor Lesetja Kganyago always retorts that the monetary policy committee is not an aviary. Fortunately, or unfortunately, no-one takes much notice. And last week’s meeting was one of those that showcased both in what some called a “hawkish hold”.
It was not too hard to see why the three “doves” prevailed over the two “hawks”, with the committee opting to hold the benchmark repo rate at 8.25%. Monetary policy decisions have to be made based on the future not the past, so last week’s lower-than-expected June inflation figures would not have tipped the decision. But the Bank has revised its headline inflation forecast for 2023 down to 6%, from 6.2% during the committee’s last meeting in May. Forecasts for the next two years are lower too, reflecting lower food, fuel and core inflation forecasts.
The rand, which is one of the biggest risks to inflation, is looking much better than it was around the time of the last meeting. It is trading at or below R18 to the dollar against the nearly R20 it hit after May’s meeting.
At current levels, the repo is seen as “restrictive”, and will become even more so if inflation comes down as expected in the coming months. For SA, as for other emerging markets, many economists are calling an end to the rate hiking cycle.
Even so, it is not too hard to see why Kganyago was insistent that this was not necessarily the end of rate hikes at all. “Serious upside risks to the inflation outlook remain,” the committee hawkishly said. Some see this as the last hike. But the committee is keeping its options open in global and domestic environments that remain highly uncertain and risky.
SA is not alone among emerging markets on this score. Unlike the world’s advanced economies, which prevaricated as inflation climbed, emerging markets know inflation when they see it. Led by Brazil, they started hiking rates well before the US, Europe or the UK.
The sharp hikes their central banks have implemented over the past couple of years have succeeded: Goldman Sachs’ economists note emerging market inflation has declined by more than developed market inflation this year, with the gap between emerging and developed market inflation falling to a historical low. Emerging market inflation is now falling even in countries where it has been exceptionally high.
Many economists are now calling an end to the emerging markets hiking cycle. But that does not mean the cutting cycle will start anytime soon: S&P Global’s economists argue that emerging market central banks will have to wait for their advanced economy peers to peak before they can consider easing rates.
Inflation is coming down in major economies, and there are hopes that their central banks can engineer a soft landing, bringing inflation back to target without recessions. Their economies are still strong and labour markets tight. But their inflation rates are still high.
The US Federal Reserve and the European Central Bank are both expected to hike rates by 25 basis points at their meetings this week. Some see further hikes. But even if this is the peak, many economists now argue that rates will be higher for longer than markets expect.
Chances are, then, that global financial conditions will remain tight and markets will remain risky for emerging market currencies. SA’s central bankers are worried about it along with their emerging market peers. But SA’s own load-shedding, politics and foreign policy bring another whole layer of risk to its currency. Which is probably why the Bank is still assuming a rand-dollar exchange rate of R18.52, well above the current level at which the rand is trading.
Load-shedding itself is a risk to inflation, as are SA’s logistics constraints. Both raise the cost of doing business. They also weigh on investor sentiment, as does SA’s perceived cosiness with Russia. Vladimir Putin is now not coming to the Brics summit in person, but we still don’t have an answer on the Lady R arms-for-Russia allegations. Foreign investors are pricing our foreign policy missteps into the cost of borrowing and the rand.
The Bank effectively targets the 4.5% midpoint of the inflation target range; inflation is expected to hit that number only late in 2025. And with inflation expectations still running well above the top of the target range, the committee is watching and waiting. So enjoy the rates pause, but don’t max out on your mortgage in the dovish belief that rates can only fall from here.
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